ASIC doesn’t prescribe a specific compliance monitoring methodology for AFS licensees. However, effective compliance monitoring is risk-based when monitoring activities are prioritised according to the likelihood and impact of compliance risks. It is not genuinely risk-based if every obligation is tested equally regardless of the licensee’s risk profile.
Expanded Answer
ASIC expects AFS licensees to maintain adequate compliance arrangements that are appropriate to the nature, scale and complexity of their business. A risk-based compliance monitoring program allocates monitoring resources to the areas most likely to result in consumer harm, regulatory breaches or operational failure. Monitoring priorities should be informed by the licensee’s risk assessment, business activities, previous compliance findings, complaints, breaches and changes to the regulatory environment.
A checklist-based approach typically applies the same tests at the same frequency regardless of changing risks or business performance. By contrast, a risk-based approach adjusts monitoring based on objective evidence. Higher-risk advisers, products, business units or control failures receive greater scrutiny, while lower-risk areas may require less frequent or less intensive monitoring. Monitoring findings should also influence future monitoring priorities and supervisory activities.
Key characteristics:
- Monitoring priorities are driven by documented compliance risks.
- Testing frequency reflects the likelihood and impact of identified risks.
- Monitoring adapts to complaints, breaches, file review findings and regulatory change.
- Results are analysed for trends, root causes and systemic issues.
- Monitoring outcomes influence supervision, remediation and future monitoring plans.
Risk-based monitoring is effective only if it leads to action. A monitoring program that repeatedly identifies the same issues without adjusting controls, supervision or remediation is unlikely to demonstrate an effective compliance framework. For further guidance, see From samples to signals: a smarter approach to AFSL surveillance.
Why it matters
Risk-based monitoring enables an AFS licensee to focus resources where they have the greatest regulatory and consumer impact. It also provides stronger evidence that compliance activities are proportionate, responsive and capable of identifying emerging risks before they become systemic failures.
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Practical guidance
- Prioritise monitoring activities using documented compliance risk assessments and emerging risk indicators.
- Adjust testing frequency and sample sizes in response to complaints, breaches and monitoring results.
- Analyse monitoring outcomes for trends and ensure remediation changes future monitoring priorities.
Further reading
From samples to signals: a smarter approach to AFSL surveillance
What does a defensible compliance framework look like for AFSL and credit licensees?
Root cause analysis for AFS licensees: a comprehensive guide